UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2014
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
000-53598
Commission File Number
SAUER ENERGY, INC.
(Name of small business issuer in its charter)
Nevada 26-3261559
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
4670 Calle Carga Unit A Camarillo, CA 93012
(Address of principal executive offices)
888-829-8748
(Registrant’s telephone number, including area code)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes X No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated Filer o Smaller reporting company X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No X
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 99,071,474 shares of common stock, par value $0.0001 per share, as of February 28, 2014.
Page1 of27
SAUER ENERGY, INC.
REPORT ON FORM 10-Q
TABLE OF CONTENTS
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PART I – Financial Information |
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Item 1. Financial Statements | 3 |
Item 2. Management’s Discussion and Analysis of |
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Financial Condition and Results of Operations | 20 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 22 |
Item 4T. Controls and Procedures | 22 |
PART II – Other Information |
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Item 1. Legal Proceedings | 25 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 25 |
Item 3. Defaults Upon Senior Securities | 25 |
Item 4. Mine Safety Disclosures | 25 |
Item 5. Other Information | 25 |
Item 6. Exhibits | 26 |
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Signatures | 27 |
Page2 of27
SAUER ENERGY, INC. | ||
(A Development Stage Enterprise) | ||
Condensed Balance Sheet | ||
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| February 28, | August 31, |
| 2014 | 2013 |
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ASSETS |
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Current Assets |
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Cash | $ 50,959 | $ 19,179 |
Receivable for Shares Issued against LOC | 27,000 | - |
| 77,959 | 19,179 |
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Property and Equipment, net | 51,506 | 62,782 |
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Other Assets |
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Intangible Assets | 1,905,000 | 1,905,000 |
Security Deposit | 14,000 | 14,000 |
| 1,919,000 | 1,919,000 |
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Total Assets | $ 2,048,465 | $ 2,000,961 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current Liabilities |
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Accounts Payable and Accrued Liabilities | $ 1,866 | $ 5,267 |
Loan Payable | 225,474 | 344,240 |
Total Current Liabilities | 227,340 | 349,507 |
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Stockholders' Equity |
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Common Stock, $0.0001 par value; authorized |
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650,000,000 shares issued and outstanding |
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93,742,564 shares outstanding on August 31, 2013 |
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92,451,049 shares outstanding on February 28, 2014 | 9,907 | 9,374 |
Additional Paid-In Capital | 6,650,192 | 6,329,522 |
Accumulated deficit during the development stage | (4,838,974) | (4,687,442) |
Total Stockholders' Equity | 1,821,125 | 1,651,454 |
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Total Liabilities and Stockholders' Equity | $ 2,048,465 | $ 2,000,961 |
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The accompanying notes are an integral part of these financial statements.
Page3 of27
SAUER ENERGY, INC. | |||||
(A Development Stage Enterprise) | |||||
Statement of Operations | |||||
(Unaudited) | |||||
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| Inception |
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| (August 7 2008) |
| For the three months ended | For the six months ended | through | ||
| February 28, | February 28, | February 28, | February 28, | February 28, |
| 2014 | 2013 | 2014 | 2013 | 2014 |
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Revenue | $ - | $ - | $ - | $ - | $ - |
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General and |
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Professional Fees | 39,608 | 10,363 | 91,264 | 40,907 | 475,420 |
Consulting | 28,072 | 39,659 | 52,203 | 58,694 | 1,265,510 |
Commitment Fees | (325,000) | 325,000 | (325,000) | 445,000 | 120,000 |
Research & development expense | 29,328 | 20,218 | 53,033 | 52,852 | 966,845 |
Other general and | 68,793 | 80,630 | 152,546 | 136,905 | 1,883,714 |
| (159,199) | 475,870 | 24,046 | 734,358 | 4,711,489 |
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Income (Loss) from operations | 159,199 | (475,870) | (24,046) | (734,358) | (4,711,489) |
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Other Income (Expense) | (127,485) | - | (127,485) | - | (127,485) |
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Income (Loss) before taxes | 31,714 | (475,870) | (151,531) | (734,358) | (4,838,974) |
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Provision (credit) for taxes | - | - | - | - | - |
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Net Income (Loss) | $ 31,714 | $ (475,870) | $ (151,531) | $ (734,358) | $ (4,838,974) |
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Basic earnings (loss) | $ 0.00 | $ (0.01) | $ (0.00) | $ (0.01) |
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Weighted average | 97,507,653 | 90,868,966 | 96,094,266 | 89,303,136 |
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SAUER ENERGY, INC. | |||||||
(A Development Stage Enterprise) | |||||||
Statement of Stockholders' Equity | |||||||
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For the period from inception (August 7, 2008) to February 28, 2014 | |||||||
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| Accumulated |
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| Deficit | Total |
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| Common Stock | Additional |
| during the | Shareholders' | |
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| Number of |
| Paid-In | Share | Development | Equity |
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| Shares | Amount | Capital | Subscriptions | Stage | (Deficit) |
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Inception: August 7, 2008 | - | $ - | $ - |
| $ - | $ - | |
| Shares issued for cash | 500,000 | 500 | 12,000 |
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| 12,500 |
| Recapitalization | (499,675) | (500) | 500 |
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| �� - |
| Development stage net (loss) |
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| (45,541) | (45,541) |
Balances August 31, 2008 | 325 | $ - | $ 12,500 |
| $ (45,541) | $ (33,041) | |
| Shares issued for cash | 138,937,175 | 13,894 | (13,894) |
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| - |
| Development stage net (loss) |
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| (12,666) | (12,666) |
Balances August 31, 2009 | 138,937,500 | $ 13,894 | $ (1,394) |
| $ (58,207) | $ (45,707) | |
| Shares cancellation | (67,437,500) | (6,744) | 6,744 |
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| - |
| Shares subscription for cash |
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| 157,200 |
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| 157,200 |
| Development stage net (loss) |
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| (214,899) | (214,899) |
Balances August 31, 2010 | 71,500,000 | $ 7,150 | $ 162,550 |
| $ (273,106) | $ (103,406) | |
| Shares issued for service fee | 552,900 | 55 | 664,675 |
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| 664,730 |
| Shares subscriptions for cash |
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| 63,910 |
| 63,910 |
| Shares issued for cash | 3,537,849 | 354 | 856,899 |
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| 857,253 |
| Development stage net (loss) |
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| (1,366,199) | (1,366,199) |
Balances August 31, 2011 | 75,590,749 | $ 7,559 | $ 1,684,124 | $63,910 | $ (1,639,305) | $ 116,288 | |
| Shares subscriptions for cash |
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| 334,893 |
| 334,893 |
| Shares issued for cash | 1,275,357 | 128 | 382,473 | (382,601) | - | - |
| Shares issued for services | 522,000 | 52 | 266,168 |
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| 266,220 |
| Shares issued for services | 200,000 | 20 | 102,180 | (200) |
| 102,000 |
| Shares issued for services | 535,000 | 53 | 272,797 |
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| 272,850 |
| Stock issued for cash | 650,000 | 65 | 194,935 |
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| 195,000 |
| Corrected error in stock |
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| 1,002 | (1,002) |
| - |
| Shares issued for cash | 24,000 | 2 | 5,998 |
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| 6,000 |
| Shares issued for legal fees @$0.60 | 125,000 | 13 | 74,987 |
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| 75,000 |
| Shares issued for legal fees | 25,000 | 3 | 14,997 |
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| 15,000 |
| Shares issued for services | 363,000 | 36 | 123,384 |
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| 123,420 |
| Shares issued for intangibles and equipment | 6,000,000 | 600 | 1,499,400 |
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| 1,500,000 |
| Share subscriptions |
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| 180,000 |
| 180,000 |
| Share subscriptions |
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| 7,000 |
| 7,000 |
| Shares issued for cash | 808,000 | 81 | 201,919 | (202,000) |
| - |
| Shares issued for services | 100,000 | 10 | 11,990 |
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| 12,000 |
| Shares issued for services | 1,000,000 | 100 | 119,900 |
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| 120,000 |
| Development stage net (loss) |
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| (1,713,636) | (1,713,636) |
Balances August 31, 2012 | 87,218,106 | $ 8,722 | $ 4,956,254 | $ - | $ (3,352,941) | $ 1,612,035 | |
| Shares issued for cash pursuant to an investment agreement | 950,980 | 95 | 119,905 |
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| 120,000 |
| Shares issued for cash | 200,000 | 20 | 49,980 |
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| 50,000 |
| Shares issued for services | 100,000 | 10 | �� 20,990 |
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| 21,000 |
| Shares issued for commitment fees | 1,479,963 | 148 | 324,852 |
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| 325,000 |
| Shares issued for services | 12,000 | 1 | 2,519 |
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| 2,520 |
| Shares issued pursuant to 1st Amendment | 2,000,000 | 200 | 429,800 |
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| 430,000 |
| Shares issued for services | 240,000 | 24 | 28,776 |
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| 28,800 |
| Shares issued for services | 250,000 | 25 | 24,975 |
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| 25,000 |
| Shares issued for PPM | 400,000 | 40 | 99,960 |
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| 100,000 |
| Certificate #4339 recalled | (1,479,963) | (148) | (324,852) |
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| (325,000) |
| Shares issued for services | 220,000 | 22 | 74,778 |
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| 74,800 |
| Shares issued for services | 50,000 | 5 | 16,995 |
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| 17,000 |
| Shares issued for services | 200,000 | 20 | 67,980 |
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| 68,000 |
| Shares issued for services | 50,000 | 5 | 16,995 |
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| 17,000 |
| Shares issued for services | 50,000 | 5 | 16,995 |
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| 17,000 |
| Shares issued for services | 35,000 | 4 | 11,897 |
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| 11,901 |
| Shares issued for services | 100,000 | 10 | 33,990 |
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| 34,000 |
| Shares issued for services | 35,000 | 4 | 11,896 |
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| 11,900 |
| Certificate #4339 reissued | 1,479,963 | 148 | 324,852 |
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| 325,000 |
| Shares issued to repay loan | 151,515 | 15 | 19,985 |
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| 20,000 |
| Development stage net (loss) |
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| (1,334,501) | (1,334,501) |
Balances August 31, 2013 | 93,742,564 | $ 9,375 | $ 6,329,522 | $ - | $ (4,687,442) | $ 1,651,455 | |
| Shares issued to repay loan, interest and fees | 110,375 | 11 | 9,989 |
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| 10,000 |
| Shares issued to repay loan, interest and fees | 200,000 | 20 | 13,580 |
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| 13,600 |
| Shares issued to repay loan, interest and fees | 500,000 | 50 | 27,950 |
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| 28,000 |
| Shares issued for cash pursuant to equity line of credit (LOC) | 555,720 | 56 | 74,944 |
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| 75,000 |
| Shares issued to repay loan, interest and fees | 300,000 | 30 | 20,130 |
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| 20,160 |
| Shares issued for cash per LOC | 250,000 | 25 | 26,375 |
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| 26,400 |
| Shares issued for cash per LOC | 300,000 | 30 | 30,834 |
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| 30,864 |
| Shares issued for cash per LOC | 300,000 | 30 | 32,106 |
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| 32,136 |
| Outstanding warrant expense |
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| 18,094 |
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| 18,094 |
| Shares issued to repay loan | 290,000 | 29 | 19,285 |
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| 19,314 |
| Shares issued for cash per LOC | 300,000 | 30 | 29,634 |
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| 29,664 |
| Shares issued for cash per LOC | 300,000 | 30 | 28,722 |
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| 28,752 |
| Shares issued to repay loan, interest and fees | 300,000 | 30 | 18,150 |
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| 18,180 |
| Shares issued for cash per LOC | 332,742 | 33 | 29,967 |
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| 30,000 |
| Shares returned to Treasury pursuant to settlement with Eclipse Advisors, LLC | (700,000) | (70) | (196,805) |
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| (196,875) |
| Shares issued to repay loan, interest and fees | 349,097 | 35 | 29,965 |
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| 30,000 |
| Shares issued to repay loan, interest and fees | 310,000 | 31 | 15,035 |
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| 15,066 |
| Shares issued for cash per LOC | 500,000 | 50 | 41,462 |
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| 41,512 |
| Shares issued to repay loan, interest and fees | 500,741 | 50 | 24,286 |
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| 24,336 |
| Shares issued for cash per LOC | 330,235 | 33 | 26,967 |
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| 27,000 |
| To correct for rounding |
| (1) |
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| (1) |
| Development stage net profit |
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| (151,532) | (151,532) |
Balances February 28, 2014 | 99,071,474 | $ 9,907 | $ 6,650,192 | $ - | $ (4,838,974) | $ 1,821,125 |
The accompanying notes are an integral part of these financial statements.
Page6 of27
SAUER ENERGY, INC. | ||||
(A Development Stage Enterprise) | ||||
Statement of Cash Flows | ||||
(Unaudited) | ||||
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| Inception | |
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| (August 7 2008) | |
| For the six months ended | through | ||
| February 28, | February 28, | February 28, | |
| 2014 | 2013 | 2014 | |
Cash flows from operating activities: |
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Net Income (loss) | $ (151,532) | $ (734,358) | $ (4,838,974) | |
Adjustments to reconcile net loss to net cash provided (used) by operating activities: |
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Security Deposit | - | - | (14,000) | |
Depreciation | 11,276 | 16,650 | 87,683 | |
Director fees issued by shares | - | - | 48,000 | |
Investor relation fees issued by shares | - | - | 180,000 | |
Other service fees issued by shares | 29,890 | - | 2,677,030 | |
Share based compensation for warrants issued | 18,094 | - | 18,094 | |
Changes in operating assets and liabilities: |
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Inventory | - | - | 1,000 | |
Accounts payable and accrued expenses | (7,051) |
| 2,456 | |
Net cash flows (used by) operating activities | (99,323) | (717,708) | (1,838,711) | |
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Cash flows from investing activities: |
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Purchase of furniture and equipment | - | - | (114,189) | |
Purchase of intangible assets | - | (430,000) | (430,000) | |
Net cash (used by) investing activities | - | (430,000) | (544,189) | |
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Cash flows from financing activities: |
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Proceeds from loan | 50,000 | 325,000 | 510,022 | |
Repayment on loan | (164,526) | (150,000) | (284,548) | |
Proceeds from shareholders' loan | - | - | 82,256 | |
Payment on shareholders' loan | - | - | (82,256) | |
Proceeds from issuance of | 272,629 | 948,520 | 2,235,385 | |
Receivable for issuance of common stock | (27,000) |
| (27,000) | |
Net cash (used by) provided by financing activities | 131,103 | 1,123,520 | 2,433,859 | |
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Net increase (decrease) in cash | 31,780 | (24,188) | 50,959 | |
Cash, beginning of the period | 19,179 | 46,954 | - | |
Cash, end of the period | $ 50,959 | $ 22,766 | $ 50,959 | |
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Supplemental cash flow disclosure: |
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Interest paid | $ 29,011 | $ 16,667 | $ 49,918 | |
Taxes paid | $ 1,732 | $ - | $ 4,618 | |
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Non Cash Investing and Financing Activities |
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Acquisition of intangible assets by shares | $ - | $ - | $ 1,905,000 | |
Acquisition of equipment by shares | - | - | 25,000 | |
| $ - | $ - | $ 1,930,000 |
The accompanying notes are an integral part of these financial statements.
Page8 of27
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
February 28, 2014
Note 1 - Organization and summary of significant accounting policies:
These unaudited interim financial statements as of and for the three months ended February 28, 2014 reflect all adjustments which, in the opinion of management, are necessary to fairly state the Company’s financial position and the results of its operations for the periods presented, in accordance with the accounting principles generally accepted in the United States of America. All adjustments are of a normal recurring nature.
These unaudited interim financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s fiscal year end August 31, 2013 report. The Company assumes that the users of the interim financial information herein have read, or have access to, the audited financial statements for the preceding period, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. The results of operations for the six month period ended February 28, 2014 are not necessarily indicative of results for the entire year ending August 31, 2014.
Following is a summary of our organization and significant accounting policies:
Organization and nature of business –Sauer Energy, Inc.(formerly: BCO Hydrocarbon Ltd.) (identified in these footnotes as “we” or the “Company”) was incorporated in the State of Nevada, United States of America on August 19, 2008. It was a natural resource exploration stage company and anticipated acquiring, exploring, and if warranted and feasible, developing natural resource assets. BCO had the right to acquire a 50% working interest in an oil and gas lease in Alberta, Canada.
Sauer Energy, Inc. (the “Old Sauer”) was incorporated in California on August 7, 2008. The Company is a development stage company engaged in the design and manufacture of vertical axis wind turbine (VAWT) systems.
On July 25, 2010, the Company, the president and sole director Malcolm Albery (“MA”) and Dieter Sauer, Jr. (“DS”) completed a closing (the “Closing”) under an Agreement and Plan of Reorganization, dated as of June 23, 2010 (the “Agreement”). The Agreement provided: (a) for the purchase by DS of all of the 39,812,500 shares of the Company owned by MA for $55,200; (b) the contribution by DS of all of the shares of Old Sauer, a California corporation (“SEI”) to the Company; (c) the assignment of certain patent rights related to wind turbine technology held by DS to the Company; and (d) the election of DS to the Company’s board of directors. In connection with the Closing, Mr. Sauer was elected President and CEO of the Company and two former shareholders of the Company agreed to (i) indemnify the Company against any claims resulting from breaches of representations and warranties by the Company in the Agreement; (ii) to acquire and cause to be returned for cancellation an aggregate of 67,437,500 shares of the Company’s common Stock, including all of the shares owned by former officer and director Daniel Brooks and; (3) assume all of the Company’s obligations in connection with certain oil and gas leases in Canada.
The agreement was executed on July 25, 2010. Sauer Energy, Inc. became a wholly-owned subsidiary of the Company. On August 29, Malcolm Albery resigned as President and was replaced by Dieter Sauer. In the following month, the Company changed its name from BCO Hydrocarbon Ltd. to Sauer Energy, Inc.
Page9 of27
Note 1 - Organization and summary of significant accounting policies (continued):
The Company’s fiscal year-end is August 31.
Basis of consolidation –Not applicable.
Basic of presentation –Our accounting and reporting policies conform to U.S. generally accepted accounting principles applicable to development stage enterprises.
Use of estimates -The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents -For purposes of the statement of cash flows, we consider all cash in banks, money market funds, and certificates of deposit with a maturity of less than three months to be cash equivalents.
Fixed assets -Property, plant and equipment is valued at cost less accumulated depreciation and impairment losses. If the costs of certain components of an item of property, plant and equipment are significant in relation to the total cost of the item, they are accounted for and depreciated separately Depreciation expense is recognized using the straight-line method for the vehicle and the double declining method for all remaining assets and is amortized over the estimated useful life of the related asset. The following useful lives are assumed:
Vehicle & Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years
Furniture & Fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Years
Fair Value of Financial Instruments -The Financial Accounting Standards Board issued ASC (Accounting Standards Codification) 820-10 (SFAS No. 157), “Fair Value Measurements and Disclosures" for financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. FASB ASC 820- 10 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that the Company uses to measure fair value:
- Level 1: Quoted prices in active markets for identical assets or liabilities. |
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- Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities.
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- Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The carrying amounts of the Company’s financial instruments as of February 28, 2014 reflect:
- Cash: Level One measurement based on bank reporting. |
- Loan receivable and loans from Officers and related parties: Level 2 based on promissory notes. |
Page10 of27
Federal income taxes-The Company utilizes FASB ACS 740,“Income Taxes”,which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. When, in the opinion of management, it is more likely than not that some part or all of the deferred tax assets will not be realized.
Interest and penalties on tax deficiencies recognized in accordance with ASC accounting standards are classified as income taxes in accordance with ASC Topic 740-10-50-19.
Research and development costs -The Company expenses costs of research and development cost as incurred. Research and development costs for the three months ended February 28, 2014, and February 28, 2013, was $29,328 and $20,218 respectively.
Advertising. Advertising and marketing expenses for the three months ended February 28, 2014, and February 28, 2013, was $1,288 and $2,843 respectively.
Basic and Diluted Earnings (Loss) Per Share -Net loss per share is calculated in accordance with FASB ASC 260, Earnings Per Share, for the period presented. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. The Company has potentially dilutive securities outstanding consisting of warrants to purchase common stock, (see Note 10). However their exercise would be anti-dilutive, since the Company is in a loss position, and they are not counted in the calculation of loss per share.
Development Stage Company -The Company is considered a development stage company, with no operating revenues during the periods presented, as defined by FASB Accounting Standards Codification ASC 915. ACS 915 requires companies to report their operations, shareholders’ deficit and cash flows since inception through the date that revenues are generated from management’s intended operations, among other things. Management has defined inception as August 7, 2008. Since inception, the Company has incurred an operating loss of $4,870,685. The Company’s working capital has been generated through advances from the principal of the Company and solicitation of subscriptions. Management has provided financial data since August 7, 2008 in the financial statements, as a means to provide readers of the Company’s financial information to be able to make informed investment decisions.
Fair Value—In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." The amendments in this update generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS. The amendments in this update are to be applied prospectively. The amendments are effective for interim and annual periods beginning after December 15, 2011. Early application is not permitted. The Company does not expect this guidance to have a significant impact on its consolidated financial position, results of operations or cash flows.
Comprehensive Income—In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income." This update was amended in December 2011 by ASU No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05." This update defers only those changes in update 2011-05 that relate to the presentation of reclassification adjustments. All other requirements in update 2011-05 are not affected by this update, including the requirement to report
Page11 of27
comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. ASU No. 2011-05 and 2011-12 are effective for fiscal years
(including interim periods) beginning after December 15, 2011. The Company does not expect this guidance to have a significant impact on its financial position, results of operations or cash flows.
Offsetting Assets and Liabilities—In December 2011, the FASB issued ASU No. 2011-11, "Disclosures about Offsetting Assets and Liabilities." The amendments in this update require enhanced disclosures around financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The amendments are effective during interim and annual periods beginning on or after January 1, 2013. The Company does not expect this guidance to have any impact on its consolidated financial position, results of operations or cash flows.
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and Page preliminary nature of those proposed standards, the Company’s management has not determined whether implementation of such standards would be material to its financial statements.
Share based payments and awards
The company has adopted the use of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R) (now contained in FASB Codification Topic 718,Compensation-Stock Compensation,orTopic 718), which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance and eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. This Statement requires an entity to measure the cost of employee services received in exchange for an award of an equity instruments, which includes grants of stock options and stock warrants, based on the fair value of the award, measured at the grant date, (with limited exceptions). Under this standard, the fair value of each award is estimated on the grant date, using an option-pricing model that meets certain requirements. We use the Black- Scholes option-pricing model to estimate the fair value of our equity awards, including stock options and warrants. The Black-Scholes model meets the requirements of Topic 718; however the fair values generated may not reflect their actual fair values, as it does not consider certain factors, such as vesting requirements, employee attrition and transferability limitations. The Black-Scholes model valuation is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We estimate the expected volatility and estimated life of our stock options at grant date based on historical volatility; however, due to the thinly traded nature of our stock, we have chosen to use an average of the annual volatility of like companies in our industry. For the “risk-free interest rate”, we use the Constant Maturity Treasury rate on 90 day government securities. The term is equal to the time until the option expires. The dividend yield is not applicable, as the company has not paid any dividends, nor do we anticipate paying them in the foreseeable future. The fair value of our restricted stock is based on the market value of our free trading common stock, on the grant date calculated using a 20 trading day average. At the time of grant, the share based-compensation expense is recognized in our financial statements based on awards that are ultimately expected to vest using historical employee attrition rates and the expense is reduced accordingly. It is also adjusted to account for the restricted and thinly traded nature of the shares. The expense is reviewed and adjusted in subsequent periods if actual attrition differs from those estimates. For the three months ended November 30, 2013, we recognized $18,094 in share based expense due to the issuance of common stock warrants. No adjustment was made as there were no new warrants issued in the three months ended February 28, 2014.
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Note 3 – Going Concern
The Company's financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has accumulated a deficit of $4,838,974 as of February 28, 2014.
In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management plans to raise additional capital through the sale of stock to pursue business development activities.
Note 4 – Property and Equipment
|
|
|
Property and Equipment consisted of the following at February 28, 2014 and August 31, 2013 | February 28, 2014 | August 31, 2013 |
Computer, equipment & truck | $ 139,189 | $ 139,189 |
Less: Accumulated depreciation/amortization | (87,683) | (76,407) |
Property and equipment, net | $ 51,506 | $ 62,782 |
Note 5 – Asset Purchase
On May 11, 2012, the Company entered into an Asset Purchase Agreement with St. George Investments LLC, an Illinois limited liability company, to acquire certain assets in foreclosure for 6,000,000 common shares. The assets were formerly owned by Helix Wind, Inc., a Nevada corporation in the same business as the Company. The assets and agreed prices were:
|
|
|
|
Asset Purchase | May 11, 2012 |
Tangible Assets |
|
Equipment | $ 23,000 |
Supplies | 1,000 |
Inventory | 1,000 |
Total Tangible Assets | $ 25,000 |
|
|
Intangible Assets |
|
Goodwill | $ 5,000 |
Intellectual Property (10 patents, 2 trademarks, network system, wind turbine monitoring system, URL | 1,467,500 |
Restrictive Covenant | $ 2,500 |
Total intangible assets acquired | $ 1,475,000 |
|
|
Total Assets acquired | $ 1,500,000 |
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Note 5 – Restricted Covenant
In January 2013 the Company entered into an amendment to the Asset Purchase Agreement of May 11, 2012 with the Seller of the assets. The Agreement contained the Company’s guarantee to indemnify the Seller against a certain drop in stock price of stock received in payment for the assets. The “Protection Period” in the agreement lasts until the Company receives cash consideration of five million dollars (the “Protection Amount”) from the issuance of common stock. Such a contingency could not be quantified by the Company and none was recorded at the fiscal year ended August 31, 2012. The Protection Period was amended with a new beginning time: nine months from August 2, 2012 or the date that an S1 stock registration statement is recorded, (the earlier). It was further agreed that Seller would forbear enforcement of the guarantee prior to the beginning of the Protection Period for the payment of 2,000,000 common shares of the Company. The stock was issued on January 7, 2013. The cost of the issue was recorded as a Restricted Covenant.
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Note 6 – Related Party Transactions:
A shareholder of the Company advanced $10,000 to the Company in the year ended August 31, 2011. The loan was repaid and had a zero balance as of the year ended August 31, 2013. The loan carried no interest, was unsecured, had no maturity date and was payable upon demand.
Note 7 – Commitments and Contingencies:
The contingency related to the indemnification of the seller of assets in the agreement of May 11, 2012, against the loss in value of contract stock from a dilutive issuance was postponed by the amended agreement, per Note 5.
In September 2012, the Company leased office and laboratory space in Camarillo, California, for three years for monthly rental payments of $7,000 per month.
Lease Commitments – for the following two fiscal years from March 1, 2014, through the end of the lease:
For the period through
Fiscal year ended
August 31,
2014 | $42,000 |
|
|
|
2015 | 84,000 |
|
| |
| $126,000 |
|
|
|
|
|
|
|
|
Note 8 - Federal income tax:
No provision was made for federal income tax, since the Company had a significant net operating loss. Net operating loss carryforwards may be used to reduce taxable income through the year 2033. The availability of the Company’s net operating loss carryforwards are subject to limitation if there is a 50% or more positive change in the ownership of the Company’s stock, unless the same or similar business is carried on. The net operating loss carryforward for federal and state income tax purposes was approximately $151,532 for the six months ended February 28, 2014. The Company has net operating losses carried forward of approximately $4,838,974 for tax purposes which will expire in 2028 through 2034 if not utilized.
No provision was made for federal income tax, since the Company had an operating loss and has accumulated net operating loss carryforwards. .
Note 9 – Capital Stock
During the period September 1 to October 17, 2011, the Company entered into a series of private placement agreements with various investors involving issuing units of securities at $0.30 per unit. Each unit consisted of one (1) share of common stock, par value $0.0001 per share and one (1) common stock purchase warrant with an exercise price of $0.60 each, expiring July 31, 2013. The private placement was oversubscribed and the Company accepted additional private placement funds.
On October 17, 2011 the Company issued 1,275,337 units of the securities in consideration of funds received of $382,601.
On October 17, 2011, the Company issued a total of 522,900 shares of restricted common stock to certain consultants as compensation for services. The fair value of the stock was $0.51. Based on the fair value of the common stock on the day of issuance, $20,462 was charged to consulting expense for the three months ended November 30, 2011, which was pro-rated for the six month period of the restriction.
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On October 17, 2011, the Company issued 200,000 shares of common stock to a consulting firm for services to be provided. The fair value of the common stock on the day it was issued was $0.51 per share. Based on the fair value of the stock on the day of issuance, $8,046 less $200 contributed was charged to consulting, which was pro-rated for the six month period of the restriction.
On October 17, 2011, the Company issued 200,000 shares of common stock to a consulting firm for services to be provided. The fair value of the common stock on the day it was issued was $0.51 per share. Based on the fair value of the stock on the day of issuance, $20,988 was charged to consulting, which was pro-rated for the six month period of the restriction.
On November 10, 2011, the Company issued 3,350 units of securities at $0.30 per unit for $1,002 cash. Each unit consisted of one (1) share of common stock, par value $0.0001 per share and one (1) common stock purchase warrant with an exercise price of $0.60 each. The common stock purchase warrants expired July 31, 2013.
On December 1, 2011, the Company issued 650,000 units of securities to seven investors at $0.30 per unit for $195,000 cash. Each unit consisted of one (1) share of common stock, par value $0.0001 per share and one (1) common stock purchase warrant with an exercise price of $0.60 each, expiring July 31, 2013.
On December 1, 2011, a correction was made to a common stock certificate, reducing shares by 3,330.
On December 1, 2011, the Company issued 24,000 units of securities to an investor at $0.25 per unit for $6,000 cash. Each unit consisted of one (1) share of common stock, par value $0.0001 per share and one (1) common stock purchase warrant with an exercise price of $0.60 each. The common stock purchase warrants expired July 31, 2013.
On January 24, 2012, the Company issued 125,000 shares of common stock at the closing price of $0.60 per share for legal fees of $75,000.
On January 26, 2012, the Company issued 25,000 shares of common stock at the closing price of $0.60 per share for legal fees of $15,000.
On April 30, 2012, the Company issued 363,000 shares of common stock at the closing price of $0.34 per share for services by six providers.
On May 11, 2012 the Company issued 6,000,000 shares of common stock pursuant to an Asset Purchase Agreement for certain wind turbine assets including intangible assets the price of which was $1,500,000, representing a stock price of $0.25 per share.
On July 31, 2012, the Company issued 808,000 units of securities at $0.25 per unit for $202,000 cash. Each unit consisted of one (1) share of common stock, par value $0.0001 per share and one (1) common stock purchase warrant with an exercise price of $0.50 each, expiring July 31, 2014.
On July 31, 2012, the Company issued 100,000 shares of common stock at $0.12 per share for legal fees of $12,000.
On July 31, 2012, the Company issued 1,000,000 shares of common stock at $0.12 per share for contract services of $120,000.
On October 10, 2012, the Company issued 950,980 shares of common stock at $0.126 per share to St George Investments LLC for $120,000 pursuant to an investment agreement.
On November 28, 2012, the Company issued 200,000 shares of common stock at $0.25 per share for $50,000
Page16 of27
On December 14, 2012, the Company issued 100,000 shares of common stock at $0.21 per share for consulting services of $21,000.
On December 14, 2012, the Company issued 1,479,963 shares of common stock at $0.2196 per share for commitment fees of $325,000.
On December 14, 2012, the Company issued 12,000 shares of common stock at $0.21 per share for consulting services of $2,520.
On January 7, 2013, the Company issued 2,000,000 shares of common stock at $0.215 per share for a restricted covenant.
On March 12, 2013, the Company issued 240,000 shares of common stock at $0.12 per share for consulting services of $28,800.
On April 5, 2013, the Company issued 250,000 shares of common stock at $0.10 per share for consulting services of $25,000.
On June 4, 2013, the Company entered into a private placement agreement that involved issuing 400,000 units of securities at $0.25 per unit for a total amount of cash of $100,000. Each unit consisted of one (1) share of common stock, par value $0.0001 per share and two (2) common stock purchase warrants for a total of 800,000 warrants expiring July 31, 2015 with an exercise price of $0.40 each.
On July 12, 2013, the Company issued 220,000 shares of common stock for $0.34 per share for consulting services of $74,800.
On July 12, 2013, the Company issued 50,000 shares of common stock for $0.34 per share for consulting services of $17,000.
On July 12, 2013, the Company issued 200,000 shares of common stock for $0.34 per share for consulting services of $68,000.
On July 12, 2013, the Company issued 50,000 shares of common stock for $0.34 per share for a bonus for consulting services of $17,000.
On July 12, 2013, the Company issued 50,000 shares of common stock for $0.34 per share for a bonus for consulting services of $17,000.
On July 12, 2013, the Company issued 35,000 shares of common stock for $0.34 per share for a bonus for consulting services of $11,900.
On July 12, 2013, the Company issued 100,000 shares of common stock for $0.34 per share for consulting services of $34,000.
On July 12, 2013, the Company issued 35,000 shares of common stock for $0.34 per share for consulting services of $11,900.
On August 16, 2013, the Company issued 151,515 shares of common stock for $0.132 per share as a conversion of $20,000of a Note Payable.
On October 2, 2013, the Company issued 200,000 shares of common stock for $0.068 per share as a conversion of $13,600 of a Note Payable.
On October 9, 2013, the Company issued 500,000 shares of common stock for $0.056 per share as a conversion of $28,000 of a Note Payable.
Page17 of27
On October 17, 2013, the Company issued 555,720 shares of common stock for $0.13 per share for Equity Line funding of $75,000.
On November 13, 2013, the Company issued 250,000 shares of common stock for $0.1056 per share for Equity Line funding of $26,400.
On November 14, 2013, the Company issued 300,000 shares of common stock for $0.10288 per share for Equity Line funding of $30,864.
On November 19, 2013, the Company issued 300,000 shares of common stock for $0.056 per share as a conversion of $16,800 of a Note Payable.
On November 19, 2013, the Company issued 300,000 shares of common stock for $0.1071 per share for Equity Line funding of $32,136.
On December 3, 2013, the Company issued 300,000 shares of common stock for $0.09888 per share for Equity Line funding of $29,664.
On December 10, 2013, the Company issued 300,000 shares of common stock for $0.09584 per share for Equity Line funding of $28,752.
On December 17, 2013, the Company issued 290,000 shares of common stock for $0.06660 per share as a conversion of $19,314 of a Note Payable.
On January 9, 2014, the Company issued 332,742 shares of common stock for $0.0902 per share for Equity Line funding of $30,000.
On January 17, 2014, the Company issued 300,000 shares of common stock for $0.06060 per share as a conversion of $18,180 of a Note Payable.
On January 22, 2014, the Company issued 349,097 shares of common stock for $0.0859 per share for Equity Line funding of $30,000.
On January 31, 2013, the Company issued 310,000 shares of common stock for $0.0486 per share as a conversion of $15,066 of a Note Payable.
On February 4, 2014, the Company issued 500,000 shares of common stock for $0.0830 per share for Equity Line funding of $41,512.
On February 18, 2014, the Company issued 500,741 shares of common stock for $0.0486 per share as a conversion of $24,336 of a Note Payable.
On February 27, 2014, the Company issued 330,235 shares of common stock for $&0.081760 per share
For Equity Line funding of $27,000, which was received by the Company on
As of February 28, 2014, the Company was authorized to issue 650,000,000 shares of par value $0.0001 common stock, of which 99,071,474 shares of common stock were issued and outstanding.
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Note 10 – Warrants
1,000,000 warrants were issued during the three months ended November 30, 2013. No warrants were issued in the three months ended February 28, 2014.
During the previous fiscal year, the Company entered into a series of private placement agreements with various investors. (Refer to Note 9– Capital Stock).
The following table is a summary of information about the warrants outstanding at February 28, 2014:
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Shares Underlying Warrants Outstanding |
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Range of Exercise Price |
| Shares Underlying \Warrants Outstanding |
| Weighted Average Remaining Contractual Life |
| Weighted Average Exercise Price | ||||||||
$0.18 ~ $0.50 |
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| 2,832,000 |
| 0.90 years |
| $ | 0.36 |
The following table is a summary of activity of outstanding stock warrants:
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| Number of Warrants |
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| Weighted Average Exercise Price |
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Balance, November 30, 2013 |
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| 2,832,000 |
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| $ | 0.36 |
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Warrants expired |
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| -0- |
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| -0- |
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Warrants cancelled |
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| -0- |
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| -0- |
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Warrants granted |
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| -0- |
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| -0- |
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Warrants exercised |
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| -0- |
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| -0- |
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Balance, February 28, 2014 |
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| 2,832,000 |
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| $ | 0.36 |
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Item 2 – Management’s Discussion and Analysis or Plan of Operation
Overview
We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions could be incorrect. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances. Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include the following:
RESULTS OF OPERATIONS
Three months ended February 28, 2014 v. three months ended February 28, 2013
Now that we are transitioning out of the development stage, research and development expenses have been replaced by professional fees as the greatest expense over the last three month period ($10,363 for the three months ended February 28, 2013, and $39,608 for the three months ended February 28, 2014). Research and development expenses have increased ($20,218 for the three months ended February 28, 2013 and $29,328 for the three months ended February 28, 2014). Other expenses include consulting, ($39,659 for the three months ended February 28, 2013, and $28,659 for the three months ended February 28, 2014); commitment fees, ($-0- for the three months ended February 28, 2013, and the reversal of $325,000 for the three months ended February 28, 2014; and other general and administrative expenses, ($80,630 for the three months ended February 28, 2013, and $68,793 for the three months ended February 28, 2014). We had a net loss of $(475,870) or $(0.00) per share for the three months ended February 28, 2013 and a net profit of $31,714 for the three months ended February 28, 2014. Please note that this profit is not a result of revenue but rather due to the settlement agreement with Eclipse Advisors which resulted in the reversal of $325,000 of commitment fees originally incurred by the Company in exchange for the return of $700,000 in shares to the treasury of the Company. As we transition from research and development to early stage manufacturing during calendar 2014, we anticipate that our research and development expenses and consulting expenses will continue to decrease while other expenses by category will continue to fluctuate, and we will begin to approach a time when we can recognize revenue from sales and incur material and manufacturing costs.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities for the three months ended February 28, 2014, was $99,323. There were no net cash flows used in investing activities for the six months ended February 28, 2014. These cash flows were offset by net proceeds of $131,103 provided from financing activities, principally the sale of stock. We had cash resources of $50,959 at February 28, 2014, and intend to rely on the sale of stock to increase liquidity to enable us to execute on our plan to manufacture and market vertical axis wind turbines. As reported on a Current Report on Form 8-K filed on May 7, 2013, we have entered into an Equity Purchase Agreement from which we anticipate raising substantial additional cash resources, but there can be no assurance that this will occur. If we are unable to raise cash through the sale of our stock, we may be required to severely restrict our operations.
Critical Accounting Policies
Financial Reporting Release No. 60 of the SEC encourages all companies to include a discussion of critical accounting policies or methods used in the preparation of the financial statements.
There are no current revenue-generating activities that give rise to significant assumptions or estimates. Our financial statements filed as part of our February 28,2014, Quarterly Report on Form 10-Q include a summary of the significant accounting policies and methods used in the preparation of our financial statements.
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Off-Balance Sheet Arrangements
We have never entered into any off-balance sheet financing arrangements and have not formed any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
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Item 3. - Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is not required as we are a smaller reporting company.
Item 4T. - Controls and Procedures
Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We conducted an evaluation, with the participation of our Chief Executive Officer who is also our principal financial officer, of the effectiveness of our disclosure controls and procedures as of February 28, 2014. Based on that evaluation, our Chief Executive Officer has concluded that as of February 28, 2014, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.
In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following two material weaknesses that have caused management to conclude that, as of February 28, 2014, our disclosure controls and procedures were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us for the year ending August 31, 2013, and the quarter ended February 28, 2014. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
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under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
*
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
*
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the issuer; and
*
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As of the end of our most recent fiscal quarter, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, as of February 28, 2014, such internal control over financial reporting was not effective. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal control over financial reporting that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; and (2) inadequate segregation of duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions and the custody of assets. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of February 28, 2014.
Management believes that the material weaknesses set forth in items (1) and (2) above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.
This quarterly report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation
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by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only the management's report in this quarterly report.
Management's Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:
We will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. First, we will create a position to segregate duties consistent with control objectives of having separate individuals perform (i) the initiation of transactions, (ii) the recording of transactions and (iii) the custody of assets. Second, we will create a senior position to focus on financial reporting and standardizing and
documenting our accounting procedures with the goal of increasing the effectiveness of the internal controls in preventing and detecting misstatements of accounting information. Third, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are
available to us. Although there is substantial uncertainty in any such estimate, we anticipate the costs of implementing these remediation initiatives will be approximately $150,000 to $200,000 a year in increased salaries, legal and accounting expenses.
Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.
We anticipate that these initiatives will be at least partially, if not fully, implemented by the end of our fiscal year in 2014.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the quarter ended February 28, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
On October 23, 2013, the Company filed a complaint against St George Investments, LLC (“St. George") in Superior Court, Ventura County California seeking declaratory relief as to contracts relating to the Company’s May, 2012 purchase of the assets of Helix Wind from St. George for treasury stock then valued in excess of $1.8 Million and a subsequent February 2013 promissory note for $275,000 executed under the terms of an amendment to the May, 2012 asset purchase agreement. The Company alleges that the Helix Wind asset purchase price has been substantially paid and, in fact, may have been overpaid in light of St. George’s failure to deliver all of the intellectual property of Helix Wind. St. George is interpreting the contracts and promissory note as entitling it to a windfall recovery above and beyond the asset purchase price and promissory note amount. On November 21, 2013, St George exercised its right as a non-California based entity to remove the action from the Ventura state court to the federal court sitting in Los Angeles, the United States District Court for the Central District of California. On November 26, 2013, St. George filed its answer and counterclaim seeking to enforce its interpretation of the contracts and to thereby collect approximately $440,000 above and beyond what is otherwise due, plus costs and attorneys fees. On February 3, 2014, the parties participated in a mediation session at the Federal Court and executed an agreement reflecting a settlement in principal (the “Settlement”) which becomes binding only if the parties are unable to come to terms on more formal settlement agreements. The parties are in negotiations on more formal settlement agreements. The basic terms of the Settlement requires the issuance of an additional 5,000,000 shares of our common stock to St George under the Helix APA; requires St. George to purchase an additional shares of our common stock for $300,000 ($0.15 per share) which is a price above the market price at the time of the Settlement fixes the amount due on the note issued to St George in connection with the Helix APA at $600,000 and grants the Company certain prepayment rights. The Settlement provides for limitations on the amounts of our common stock that St. George may sell into the market. When the parties execute final settlement agreements, the Company will file the same with a current or periodic report.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3 – Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable
Item 5 – Other Information
None.
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Item 6 – Exhibits
The following documents are filed as part of this Report.
31.1* Certification of Chief Executive and Financial Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a).
32.1* Certification pursuant to Securities Exchange Act of 1934 Rule 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.
101.INS** XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Schema Document
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document
________________________
*Filed herewith.
**Furnished herewith.
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SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
SAUER ENERGY, INC.
Date: April 21, 2014
By: /s/Dieter R. Sauer, Jr.
Name: Dieter R. Sauer, Jr., CEO
(Principal Executive, Accounting and Financial Officer)
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